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Wednesday, February 6, 2013

Winter 2013 Journal of Economic Perspectives

The Winter 2013 issue of my own Journal of Economic Perspectives is now available on-line. Like all issues of JEP back to the first issue in 1987, it is freely available here, courtesy of the American Economic Association. I will probably put put some posts about individual articles in the next week or so, but here is an overview. The issue has two symposia of four papers each: one on the economics of patents and the other on tradeable pollution allowances. There are a couple of individual papers, one on the empirical work about prospect theory 30 years after that theory was formulated, and the other a look back at the famous RAND health insurance experiment. My own "Recommendations for Further Reading" rounds out the issue. Here are abstracts for the papers, with links to the text.

Symposium on Patents

"The Case against Patents," by Michele Boldrin and David K. Levine

The
case against patents can be summarized briefly: there is no empirical
evidence that they serve to increase innovation and productivity, unless
productivity is identified with the number
of patents awarded—which, as evidence shows, has no correlation with
measured productivity. Both theory and evidence suggest that while
patents can have a partial equilibrium effect of
improving incentives to invent, the general equilibrium effect on
innovation can be negative. A properly designed patent system might
serve to increase innovation at a certain time and place. Unfortunately,
the political economy of government-operated patent systems indicates
that such systems are susceptible to pressures that cause the ill
effects of patents to grow over time. Our preferred policy solution is
to abolish patents entirely and to find other legislative instruments,
less open to lobbying and rent seeking, to foster innovation when there
is clear evidence that laissez-faire undersupplies it. However, if that
policy change seems too large to swallow, we discuss in the conclusion a
set of partial reforms that could be implemented.Full-Text Access |
Supplementary Materials

"Patents and Innovation: Evidence from Economic History," by Petra Moser

What
is the optimal system of intellectual property rights to encourage
innovation? Empirical evidence from economic history can help to inform
important policy questions that have been difficult to answer with
modern data: For example, does the existence of strong patent laws
encourage innovation? What proportion of innovations is patented? Is
this share constant across industries and over time? How does patenting
affect the diffusion of knowledge? How effective are prominent
mechanisms, such as patent pools and compulsory licensing, that have
been proposed to address problems with the patent system? This essay
summarizes results of existing research and highlights promising areas
for future research.Full-Text Access |
Supplementary Materials

"The New Patent Intermediaries: Platforms, Defensive Aggregators, and Super-Aggregators," by Andrei Hagiu and David B. Yoffie

The
patent market consists mainly of privately negotiated, bilateral
transactions, either sales or cross-licenses, between large companies.
There is no eBay, Amazon, New York Stock
Exchange, or Kelley's Blue Book equivalent for patents, and when buyers
and sellers do manage to find each other, they usually negotiate under
enormous uncertainty: prices of similar patents
vary widely from transaction to transaction and the terms of the
transactions (including prices) are often secret and confidential.
Inefficient and illiquid markets, such as the one for patents,
generally create profit opportunities for intermediaries. We begin with
an overview of the problems that arise in patent markets, and how
traditional institutions like patent brokers, patent pools, and
standard-setting organizations have sought to address them. During the
last decade, a variety of novel patent intermediaries has emerged. We
discuss how several online platforms have started services for buying
and selling patents but have failed to gain meaningful traction. And new
intermediaries that we call defensive patent aggregators and superaggregators
have become quite influential and controversial in the technology
industries they touch. The goal of
this paper is to shed light on the role and efficiency tradeoffs of
these new patent intermediaries. Finally, we offer a provisional
assessment of how the new patent intermediary institutions affect
economic welfare.Full-Text Access |
Supplementary Materials

Among
the main criticisms currently confronting the US Patent and Trademark
Office are concerns about software patents and what role they play in
the web of litigation now proceeding in the smart phone industry. We
will examine the evidence on the litigation and the treatment by the
Patent Office of patents that include software elements. We present
specific empirical evidence regarding the examination by the Patent
Office of software patents, their validity, and their role in the smart
phone wars. More broadly, this article discusses the competing values at
work in the patent system and how the system has dealt with disputes
that, like the smart phone wars, routinely erupt over time, in fact
dating back to the very founding of the United States. The article
concludes with an outlook for systematic policymaking within the patent
system in the wake of major recent legislative and administrative
reforms. Principally, the article highlights how the US Patent Office
acts responsibly when it engages constructively with principled
criticisms and calls for reform, as it has during the passage and now
implementation of the landmark Leahy-Smith America Invents Act of 2011.Full-Text Access |
Supplementary Materials

Symposium on Tradeable Pollution Allowances

"Markets for Pollution Allowances: What Are the (New) Lessons?" by Lawrence H. Goulder

About
45 years ago a few economists offered the novel idea of trading
pollution rights as a way of meeting environmental goals. Such trading
was touted as a more cost-effective alternative to
traditional forms of regulation, such as specific technology
requirements or performance standards. The principal form of trading in
pollution rights is a cap-and-trade system, whose essential elements are
few and simple: first, the regulatory authority specifies the cap—the
total pollution allowed by all of the facilities covered by the
regulatory program; second, the regulatory authority distributes the
allowances, either by auction or through free provision; third, the
system provides for trading of allowances. Since the 1980s the use of
cap and trade has grown substantially. In this overview article, I
consider some key lessons about when cap-and-trade programs work well,
when they perform less effectively, how they work compared with other
policy options, and how they might need to be modified to address issues
that had not been anticipated.Full-Text Access |
Supplementary Materials

"The SO2 Allowance Trading System: The Ironic History of a Grand Policy Experiment," by Richard Schmalensee and Robert N. Stavins

Two
decades have passed since the Clean Air Act Amendments of 1990 launched
a grand experiment in market-based environmental policy: the SO2 cap-and-trade system. That system performed well but created four striking ironies: First, by creating this system to reduce SO2
emissions to curb acid rain, the government did the right thing for the
wrong reason. Second, a substantial source of this system's
cost-effectiveness was an unanticipated consequence of earlier railroad
deregulation. Third, it is ironic that cap-and-trade has come to be
demonized by conservative politicians in recent years, as this
market-based, cost-effective policy innovation was initially championed
and implemented by Republican administrations. Fourth, court decisions
and subsequent regulatory responses have led to the collapse of the SO2 market, demonstrating that what the government gives, the government can take away.Full-Text Access |
Supplementary Materials

"Carbon Markets 15 Years after Kyoto: Lessons Learned, New Challenges," by Richard G. Newell, William A. Pizer and Daniel Raimi

Carbon
markets are substantial and they are expanding. There are many lessons
from market experiences over the past eight years: there should be fewer
free allowances, better management of market-sensitive information, and
a recognition that trading systems require adjustments that have
consequences for market participants and market confidence. Moreover,
the emerging
market architecture features separate emissions trading systems serving
distinct jurisdictions and a variety of other types of policies exist
alongside the carbon markets.This situation is in sharp
contrast to the top-down, integrated global trading architecture
envisioned 15 years ago by the designers of the Kyoto Protocol and
raises a suite of new questions. In this new architecture, jurisdictions
with emissions trading have to decide how, whether, and when to link
with one another. Stakeholders and policymakers must confront how to
measure the comparability of efforts among markets as well as relative
to a variety of other policy approaches. International
negotiators must in turn work out a global agreement that can
accommodate and support increasingly bottom-up approaches to carbon
markets and climate change mitigation.Full-Text Access |
Supplementary Materials

"Moving Pollution Trading from Air to Water: Potential, Problems, and Prognosis," by Karen Fisher-Vanden and Sheila Olmstead

This
paper seeks to assess the current status of water quality trading and
to identify possible problems and solutions. Water pollution permit
trading programs have rarely been comprehensively described and analyzed
in the peer-reviewed literature. Including active
programs and completed or otherwise inactive programs, we identify
approximately three dozen initiatives. We describe six criteria for
successful pollution trading programs and consider how these apply to
standard water quality problems, as compared to air quality. We then
highlight some important issues to be resolved if current water quality
trading programs are to function as the "leading edge" of a new frontier
in cost-effective pollution permit trading in the United
States.Full-Text Access |
Supplementary Materials

Individual articles

"Thirty Years of Prospect Theory in Economics: A Review and Assessment," by Nicholas C. Barberis

In 1979, Daniel Kahneman and Amos Tversky, published a paper in Econometrica
titled "Prospect Theory: An Analysis of Decision under Risk." The paper
presented a new model of
risk attitudes called "prospect theory," which elegantly captured the
experimental evidence on risk taking, including the documented
violations of expected utility. More than 30 years later,
prospect theory is still widely viewed as the best available description
of how people evaluate risk in experimental settings. However, there
are still relatively few well-known and broadly
accepted applications of prospect theory in economics. One might be
tempted to conclude that, even if prospect theory is an excellent
description of behavior in experimental settings, it is less relevant
outside the laboratory. In my view, this lesson would be incorrect. Over
the past decade, researchers in the field of behavioral economics have
put a lot of thought into how prospect theory should be applied in
economic settings. This effort is bearing fruit. A significant body of
theoretical work now incorporates the ideas in prospect theory into more
traditional models of economic behavior, and a growing body of
empirical work tests the predictions of these new theories. I am
optimistic that some insights of prospect theory will eventually find a
permanent and significant place in mainstream economic analysis.Full-Text Access |
Supplementary Materials

Between
1974 and 1981, the RAND health insurance experiment provided health
insurance to more than 5,800 individuals from about 2,000 households in
six different locations across the
United States, a sample designed to be representative of families with
adults under the age of 62. More than three decades later, the RAND
results are still widely held to be the "gold standard" of
evidence for predicting the likely impact of health insurance reforms on
medical spending, as well as for designing actual insurance policies.
On cost grounds alone, we are unlikely to see
something like the RAND experiment again. In this essay, we reexamine
the core findings of the RAND health insurance experiment in light of
the subsequent three decades of work on the
analysis of randomized experiments and the economics of moral hazard.
First, we re-present the main findings of the RAND experiment in a
manner more similar to the way they would be
presented today. Second, we reexamine the validity of the experimental
treatment effects. Finally, we reconsider the famous RAND estimate that
the elasticity of medical spending with
respect to its out-of pocket price is -0.2. We draw a contrast between
how this elasticity was originally estimated and how it has been
subsequently applied, and more generally we caution
against trying to summarize the experimental treatment effects from
nonlinear health insurance contracts using a single price elasticity.Full-Text Access |
Supplementary Materials